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Online retail is the symptom not the disease

French Connection – famous for its “FCUK Fashion” advertising campaign – is the latest UK retailer to run into trouble as the retail apocalypse unfolds:

 “Shares in struggling fashion chain French Connection have risen 25% to 55p after it said it may be up for sale.

“Following speculation at the weekend, it said it was ‘reviewing all strategic options’ including the potential sale of the firm.  It adds, though, there is no certainty an offer will be made for the company.

“French Connection… has made a loss for each of the five most recent years…”

According to the mainstream media narrative, the collapse of the British “bricks and mortar” retail sector is due to the rise of online shopping; with Amazon cast in the role of chief villain.  As a recent report by former retail CEO Bill Grimsey notes:

“The ONS states that average weekly spending online (internet sales values non-seasonally adjusted) in May 2013 was £582 million. This was an increase of 10.3% compared with May 2012. The amount spent online accounted for 9.7% of all retail spending excluding automotive fuel.. In the food sector 3.4% of spending was online. This sector has the lowest proportion of online spending in relation to all spending.”

Compounding this problem is the impact of Britain’s antiquated and now insane Business Rates system; which taxes businesses on the size of their premises rather than the size of their balance sheets:

“Business rates have become a significant part of the overheads of a retail business. The impact of these costs, which have risen significantly in recent years as a result of successive large increases in September’s RPI have led to the net rate yield increasing by £2.615bn between 2008-09 and 2012-13.”

Finally, there are the additional costs to doing business imposed by government, such as compulsory pension contributions and the minimum wage; which online retailers get around via self-employment using the so-called “gig economy.”

The typical politician’s response to this is to “level the playing field” upward levying new taxes on internet sales that will inevitably be charged to customers and/or passed on to already hard-pressed suppliers.  As with so many things, this response is the result of most politicians and their advisors being wholly out of touch with the reality of life for the majority of the people.  The growth in online retail is not born out of convenience; it is born out of cost.  And the reason we have seen such a big shift since 2010 is precisely because real terms incomes have been falling; particularly for those in the bottom eighty percent of the income ladder.

Government policy in the wake of the 2008 crash was to save the banks with public borrowing that was then to be paid back by government attempting to run budget surpluses (spending less than they receive in taxation); so-called “austerity.”  At the same time, companies and households with outstanding debt attempted to pay it off; while banks were reluctant to lend.  In effect, the two means by which currency enters the economy – via government spending or via private borrowing – were jammed into reverse:

More cash out than in

To begin with, the effects of the austerity were concentrated at the government’s chosen scapegoats – the unemployed, disabled people, single mothers and low-skilled migrants.  Over time, however, the broader freeze on public sector pay began to erode the purchasing power of a much wider part of the population.  Meanwhile, a lack of growth in the key high-skilled/high-paid sectors of the economy meant that what growth in employment has been achieved is in the lowest-paying, labour-intensive sectors of the economy such as social care and hospitality.  The overall result is that despite an official unemployment rate comparable (although the calculations were different then) to the early 1970s, the majority of Britain’s workforce is worse off today than we were a decade ago.

It should come as no surprise to find that spending patterns have shifted as a result of a decade of austerity.  Everything on the High Street was set up in an era of rising wages and copious consumption.  Everything online was developed to lower costs to an absolute minimum.  This means that it is now far cheaper to purchase non-food items online than it is to incur rising bus/train fares or parking charges in order to visit a High Street shop that will inevitable have fewer goods for sale; all at a higher price.

In the food sector, where short shelf-life often works against online retailing, the rise of discount stores like Aldi and Lidl has been pronounced.  So much so that Britain’s leading supermarket – Tesco – has been obliged to open its own discount chain in order to remain competitive.  This, however, will most likely result in a race to the bottom that may well bankrupt much of the UK’s food production as supplier payments are cut even further.

This is the flaw in austerity politics; it causes everyone to cut back.  What began with a cut in government spending translated into a cut in consumer spending.  This, in turn, obliged retailers to cut back on their costs.  Those that could shift online could take advantage of lower taxes and lax working conditions to drive down prices (but also to hold down purchasing power in the economy).  Those that could not go online were obliged to pass their rising costs onto others (again driving wages down in their suppliers’ businesses, and thereby removing purchasing power from the economy).  One such “supplier” which has been hit particularly hard is the commercial real estate sector – the landlords who rent property to Britain’s shrinking retail sector.  As Judith Evans at the Financial Times reports:

“UK landlords are struggling to offload billions of pounds’ worth of shopping centres and retail parks, as the crisis in bricks-and-mortar retail ripples into the property sector.

“At least £2.5bn of retail properties are currently being marketed, according to FT data based on information from agents, while some property companies privately place the total available to buy as high as £5bn.”

Unfortunately, investors in UK commercial property include many pension and insurance firms, with the likely result being higher contributions/premiums and lower returns; again removing vital purchasing power from the economy.  Meanwhile any outstanding debt on commercial property may soon end up being written off as landlords become insolvent; adding to the pressures building on the banking and finance sector.

Taxing online shopping will not only fail to resolve this growing crisis; it will make it worse.  This is because UK households are currently being hit by two additional and unavoidable drains on their spending power.  First, and most obviously, the Bank of England has begun the process of raising interest rates.  The result is that everyone with outstanding debt now has to pay more to service it.  Worse still as fixed-rate mortgages taken out when the interest rate was just 0.25% roll over, thousands of borrowers will be faced with a much higher servicing costs.  Second, the period of relatively low oil prices following the overproduction in the US shale patch is receding in the rear-view mirror.  A barrel of oil in 2018 is double the price of a barrel of oil in 2016.  The inevitable result is that fuel and transport costs are rising to pre-crash levels once again.  And since fuel costs impact almost everything else in the economy, sooner rather than later we are going to see the return of high inflation rates.

In these circumstances, the greatest danger is that central banks try to curb this fuel-induced inflation by raising interest rates faster and further.  This was what they did between 2006 and 2008; and in terms of inflation, they were spectacularly successful.  The collapse in the US housing market caused the deepest economic crisis that the world has ever seen, with the result that inflation turned into deflation then – even with massive stimulus and low interest rates – into a decade of stagnation.

Unfortunately, the alternatives may be equally unpalatable in the long term.  Government currency-printing with a view to investing in infrastructure or simply to distribute “helicopter money” through some mechanism such as Universal Basic Income would have the immediate effect of redistributing some wealth from the one percent to the ninety-nine percent.  However, unless the injection of new currency can bring forward new sources of cheap energy and resources with which to provide real (as opposed to financial) economic growth, then the new currency will be inflationary.  Sadly, the energy and resource trends are pointing in the opposite direction – the vast reserves of cheap oil that fuelled the 1953-1973 global economic boom are gone forever.  And while economists continue to believe that those years were “normal” – and base their advice accordingly – it is increasingly clear that they were a once and for good anomaly.  Far from economic growth, we are already in a period of “degrowth” (something that our ex-industrial regions have been experiencing for several decades).

The question, then, is how we address collapsing purchasing power in an economy that not only cannot grow, but that is likely to shrink – perhaps rapidly – in future?  Interestingly, despite not seeing the enormity of the crisis, Grimsey accepts that there will be no going “back to normal”:

“At the moment the post-retail landscape is unclear but we expect it to develop around multipurpose community hubs. Education, housing, leisure, arts and health will play a much bigger role… You can see glimpses of this future already.  From the intergenerational networks popping up in London and the work of charities like 3Space offering free space in empty buildings for social enterprises to ‘innovation alleys’, where high-tech and non-profit start-ups cluster, and the civic hacking movement in US libraries.”

Grimsey is over-optimistic about a digital sector whose energy and resource costs are largely hidden (at the datacentres and in the infrastructure) from the end users.  However, insofar as digital products are replacing physical items (e.g. the switch from CDs/DVDs to digital files) then this sector fits in with the general trend to a less consumptive economy.  The problem with this vision, however, is that it cannot be financed.  Banks will only lend if they are guaranteed interest; which has to be financed by growth.  Similarly, governments can only borrow so long as future taxpayers can repay the loan with interest; again, requiring economic growth.  Government could – and should – use its ability to print currency into existence without interest attached to finance some of the transition; but this will inevitably result in inflation as more and more currency is left chasing less and less material wealth.

A less materialistic economy would probably be welcome to most of us; particularly if it means spending less time doing bullshit jobs and more time spent with family, friends and communities.  The problem is that most of us do not have the power of decision.  The vested interests within states, corporations and banking are not about to give up their way of life without a fight.  And what that most likely means is that they will continue to attempt to maintain this economy until all of its foundations have been swept away.  Then, when the inevitable crash comes, it will result in complete collapse rather than an orderly transition to something new.

As you made it to the end…

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